St. Kitts-Nevis-Anguilla National Bank Limited. Consolidated Financial Statements June 30, 2018 (expressed in Eastern Caribbean dollars)

Transcription

1 St. Kitts-Nevis-Anguilla National Bank Limited Consolidated Financial Statements (expressed in Eastern Caribbean dollars)

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6 Consolidated Statement of Financial Position As of Assets Notes Cash and balances with Central Bank 5 223, ,707 Treasury bills 6 102, ,756 Deposits with other financial institutions 7 434, ,345 Loans and receivables Loans and advances to customers 8 763, ,312 Originated debt 9 257, ,209 Investment securities available-for-sale , ,845 Financial asset , ,124 Property inventory 11 8,751 7,902 Investment property 12 4,040 4,040 Income tax recoverable 18 17,791 30,134 Property, plant and equipment 13 34,685 36,543 Intangible assets Other assets 15 60,078 57,113 Total assets 3,683,801 3,778,329 Liabilities Customers deposits 16 2,834,300 3,032,091 Liability under acceptances, guarantees and letters of credit 7,552 7,456 Accumulated provisions, creditors and accruals , ,987 Income tax liability 18 17,557 3,624 Deferred tax liability 18 9,997 6,732 Total liabilities 3,088,753 3,228,890 Shareholders equity Issued share capital , ,000 Share premium 3,877 3,877 Retained earnings 76,508 49,509 Reserves , ,053 Total shareholders equity 595, ,439 Total liabilities and shareholders equity 3,683,801 3,778,329 The notes on pages 1 to 94 are an integral part of these consolidated financial statements. Approved for issue by the Board of Directors on November 22,.

7 Consolidated Statement of Income For the year ended Notes Interest income 82,899 85,643 Interest expense (45,874) (53,614) Net interest income 21 37,025 32,029 Fees and commission income 14,859 16,652 Fees expense (15,028) (11,351) Net fees and commission income 22 (169) 5,301 Other income ,904 79,381 Operating income 162, ,711 Non-interest expenses Administrative and general expenses 24 42,902 44,845 Other expenses 26 29,113 24,920 Impairment expense 25 8,218 11,091 Total operating expenses 80,233 80,856 Net income before tax 82,527 35,855 Income tax (expense)/credit 18 (30,440) 3,595 Net income for the year 52,087 39,450 Earnings per share (basic and diluted) The notes on pages 1 to 94 are an integral part of these consolidated financial statements.

8 Consolidated Statement of Comprehensive Income For the year ended Notes Net income for the year 52,087 39,450 Other comprehensive income: Other comprehensive income to be reclassified to profit or loss in subsequent periods: Available-for-sale financial assets: Unrealised fair value gains on investment securities, net of tax 42,670 53,586 Reclassification adjustments relating to available-for-sale financial assets disposed of in the year (35,003) (238) Other comprehensive income not to be reclassified to profit or loss in subsequent periods: 20 7,667 53,348 Re-measurement (loss)/gain on defined benefit asset, net of tax 20 (645) 2,569 Net other comprehensive income 7,022 55,917 Total comprehensive income for the year 59,109 95,367 The notes on pages 1 to 94 are an integral part of these consolidated financial statements.

9 Consolidated Statement of Changes in Shareholders Equity For the year ended Notes Issued share capital Share premium Statutory reserves Other reserves Revaluation reserves Retained earnings Total Balance at July 1, ,000 3, , ,580 (34,700) 32, ,572 Net income for the year 39,450 39,450 Other comprehensive income 2,569 53,348 55,917 Total comprehensive income for the year 2,569 53,348 39,450 95,367 Transfer to reserves 20 7,317 1,490 (8,807) Transaction with owners: Dividends 28 (13,500) (13,500) Balance at June 30, 135,000 3, , ,639 18,648 49, ,439 Net income for the year 52,087 52,087 Other comprehensive income (645) 7,667 7,022 Total comprehensive income for the year (645) 7,667 52,087 59,109 Transfer to reserves 20 10,026 1,562 (11,588) Transaction with owners: Dividends 28 (13,500) (13,500) Balance at 135,000 3, , ,556 26,315 76, ,048 The notes on pages 1 to 94 are an integral part of these consolidated financial statements.

10 Consolidated Statement of Cash Flows For the year ended Cash flows from operating activities Net income before tax Adjustments for: 82,527 35,855 Interest expense 45,874 53,614 Impairment expense Depreciation and amortisation 8,218 2,767 11,091 3,079 Pension expense Loss on disposal of equipment and intangible assets Write-off of projects ongoing to expense Dividend income (10,349) (5,822) Interest income (82,899) (85,643) Operating income/(loss) before changes in operating assets and liabilities 46,703 13,054 (Increase)/decrease in operating assets: Loans and advances to customers (61,531) (9,066) Mandatory deposits with Central Bank 2,750 2,301 Financial asset Other assets 34,404 (8,933) 1,750 5,901 Increase/(decrease) in operating liabilities: Customers deposits (193,118) (15,783) Accumulated provisions, creditors and accruals 40,360 6,740 Cash (used in)/generated from operations (139,365) 4,897 Interest received 78,673 44,892 Pension contributions paid (1,667) (486) Income tax paid (4,358) (1,517) Interest paid (50,547) (55,012) Net cash used in operating activities (117,264) (7,226) Cash flows from investing activities Proceeds from sale of investment securities and originated debts Decrease in special term deposits 1,163,705 20, ,568 Decrease in restricted term deposits and treasury bills 18,177 40,197 Interest received Dividends received 13,136 10,349 14,336 5,822 Proceeds from disposal of equipment and intangible assets 7 Acquisition of intangible assets Acquisition of property, plant and equipment (235) (725) (115) (2,519) Acquisition of property inventory (938) Purchase of investment securities and originated debt (1,305,471) (1,198,833) Net cash used in investing activities (81,733) (167,537) Subtotal carried forward (198,997) (174,763)

11 Consolidated Statement of Cash Flows continued For the year ended Notes Subtotal brought forward (198,997) (174,763) Cash flows from financing activities Increase/(decrease) in liability under acceptances, guarantees and letters of credit 96 (512) Dividends paid 28 (13,500) (13,500) Net cash used in financing activities (13,404) (14,012) Net decrease in cash and cash equivalents (212,401) (188,775) Cash and cash equivalents, beginning of year 764, ,871 Cash and cash equivalents, end of year , ,096 The notes on pages 1 to 94 are an integral part of these consolidated financial statements.

12 1 Incorporation and principal activity (the Bank ) was incorporated as a public limited company on February 15, 1971 under the Companies Act Chapter 335, and was re-registered under the new Companies Act No. 22 of 1996 on April 14, The Bank operates in both St. Kitts and Nevis and is subject to the provisions of the Banking Act of The Bank is listed on the Eastern Caribbean Securities Exchange. The Bank s registered office is at Central Street, Basseterre, St. Kitts. The principal activities of the Bank and its subsidiaries (the Group ) are described below. The Bank is principally involved in the provision of financial services. The Bank s subsidiaries and their activities are as follows: National Bank Trust Company (St. Kitts-Nevis-Anguilla) Limited ( Trust Company ) The Trust Company was incorporated on the 26 th day of January, 1972 under the Companies Act Chapter 335, and was re-registered under the new Companies Act No. 22 of 1996 on the 14 th day of April The principal activity of the Trust Company is the provision of long-term mortgage financing, raising longterm investment funds, real estate development, property management and the provision of trustee services. National Caribbean Insurance Company Limited ( Insurance Company ) The Insurance Company was incorporated on the 20th day of June, 1973 under the Companies Act Chapter 335, and was re-registered under the new Companies Act No. 22 of 1996 on the 14th day of April The Insurance Company provides life insurance coverage, non-life insurance coverage and pension schemes. St. Kitts and Nevis Mortgage and Investment Company Limited ( MICO ) MICO was incorporated on the 25th day of May, 2001 under the Companies Act No. 22 of 1996 and commenced operations on the 13th day of May, MICO acts as the real estate arm of the Bank with its main operating activities being the acquisition and sale of properties. (1)

13 2 Significant accounting policies The principal accounting policies applied in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC). The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain properties and financial instruments. The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note Changes in accounting policies New and revised standards that are effective for annual periods beginning on or after July 1, Certain new standards, interpretations and amendments to existing standards have been published that became effective during the current financial year. International Accounting Standard (IAS) 12 (Amendments), Income Taxes. The amendments clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset s tax base. They also clarify certain other aspects of accounting for deferred tax assets. Deferred tax assets are assessed in combination with other deferred tax assets where the tax law does not restrict the source of taxable profits against which particular types of deferred tax assets can be recovered. Where restrictions apply, deferred tax assets are assessed in combination only with other deferred tax assets of the same type. The amendment also clarifies that tax deductions resulting from the reversal of deferred tax assets are excluded from the estimated future taxable profit that is used to evaluate the recoverability of those assets. IAS 7 (Amendments), Statement of Cash flows. The amendment introduces an additional disclosure that will enable users of the consolidated financial statements to evaluate changes in liabilities arising from financing activities. The amendment is part of the IASB s Disclosure Initiative, which continues to explore how separate financial statement disclosure can be improved. An entity is required to disclose information that will allow users to understand changes in liabilities arising from financing activities. This includes changes arising from cash flows, such as drawdowns and repayments of borrowings; and non-cash changes, such as acquisitions, disposals and unrealised exchange differences. These new and revised to standards do not have a significant impact on these consolidated financial statements and therefore disclosures have not been made. (2)

14 2 Significant accounting policies continued 2.2 Changes in accounting policies continued Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group At the date of authorisation of these consolidated financial statements, certain new standards, and amendments to existing standards have been published by the IASB that are not yet effective, and have not been adopted early by the Group. Information on those expected to be relevant to the Group s consolidated financial statements is provided below. Management anticipates that all relevant pronouncements will be adopted in the Group s accounting policies for the first period beginning after the effective date of the pronouncement. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group s consolidated financial statements. IFRS 15, Revenue from Contracts with Customers In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18, Revenue, IAS 11, Construction Contracts, and the related Interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition. Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when control of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15. (3)

15 2 Significant accounting policies continued 2.2 Changes in accounting policies continued Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group continued IFRS 15, Revenue from Contracts with Customers continued The directors have not yet fully assessed the impact of IFRS 15 in these consolidated financial statements, and are not yet in a position to provide quantified information. It is not practicable to provide a reasonable estimate of the effect of IFRS 15 until the Group performs a detailed review. The new standard is required to be applied for annual reporting periods beginning on or after January 1,. IFRS 9, Financial Instruments (2014) IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include (a) impairment requirements for financial assets and (b) limited amendments to the classification and measurement requirements by introducing a fair value through other comprehensive income (FVTOCI) measurement category for certain simple debt instruments. IFRS 9 replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through other comprehensive income and fair value through profit and loss. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Classification for debt instruments is driven by the entity s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest ( SPPI ). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets cash flows and sells assets may be classified as FVTOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVTPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. Management is in the process of assessing how the Group s business model will impact the classification and measurement of financial assets in scope of IFRS 9. An Implementation Committee for the Group was created to oversee the implementation project. The project involves three phases: (4)

16 2 Significant accounting policies continued 2.2 Changes in accounting policies continued Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group continued IFRS 9, Financial Instruments (2014) continued Phase 1: Key decisions; this includes identification of key decisions, deciding on the measurement and classification for all products, determining stage migration and cure rate thresholds; Phase 2: Assessing availability of data, defining and determining detailed modelling methodology across different businesses based on available data, resources and infrastructure, defining and developing methodology to estimate unadjusted ECL and defining methodology to incorporate forward looking information; and Phase 3: Implementation; this includes finalising the forward-looking scenarios and determining the weight for each scenario and estimating ECL with forward looking information. Currently, management has completed Phase 1 and key decisions around classification and measurement of financial assets are currently being reviewed by management. Phase 2 has also been started and data gaps are being addressed and management is working on the ECL methodology. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. The new standard is not expected to impact the Group s financial liabilities as there are no financial liabilities which are currently designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually uses for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The new standard relating to hedge accounting is not expected to impact the Group s consolidated financial statements, as the Group does not use hedge accounting. The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, an allowance is required for expected credit losses ( ECL ) resulting from default events that are possible within the next 12 months ( 12-month ECL ). In the event of a significant increase in credit risk, allowance is required for ECL resulting from all possible default events over the expected life of the financial instrument ( lifetime ECL ). Financial assets where 12-month ECL is recognised are considered to be Stage 1 ; financial assets which are considered to have experienced a significant increase in credit risk are in Stage 2 ; and financial assets for which there is objective evidence of impairment so are considered to be in default or otherwise credit impaired are in Stage 3. The assessment of whether credit risk has increased significantly since initial recognition is performed on an ongoing basis by considering the change in the risk of default occurring over the remaining life of the financial instrument, rather than by considering an increase in ECL. The assessment of credit risk and the estimation of ECL (5)

17 2 Significant accounting policies continued 2.2 Changes in accounting policies continued Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group continued IFRS 9, Financial Instruments (2014) continued are required to be unbiased and probability-weighted and should incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forward-looking information specific to the counterparty as well as forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39. It will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39. The Group is in the process of assessing the full impact of the impairment requirements of IFRS 9. The Implementation Committee which has been established is currently working to determine stage migration and cure rate for financial assets. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group disclosures about its financial instruments particularly in the year of the adoption of the new standard. Amendments to IFRS 4 Applying IFRS 9, Financial Instruments, with IFRS 4, Insurance Contracts In September 2016, the IASB published Applying IFRS 9, Financial Instruments, with IFRS 4, Insurance Contracts, which makes narrow scope amendments to IFRS 4, Insurance Contracts. The IASB issued the amendments to address the temporary accounting consequences of the different effective dates of IFRS 9, Financial Instruments, and the new insurance contracts Standard, IFRS 17. The new insurance contracts Standard is yet to be finalised and will have an effective date January 1, Therefore, its mandatory effective date will be after the effective date of IFRS 9. Considerable concerns were raised over the practical challenges of insurance companies implementing both new standards on different dates as a result of the significant accounting changes. Further concerns were raised over the potential for increased volatility in profit or loss if IFRS 9 s new requirements for financial instruments come into force before the new insurance accounting rules. To address these concerns while still fulfilling the needs of users of financial statements, the IASB has responded by amending IFRS 4 and introducing the following alternatives: an overlay approach an option for all entities that issue insurance contracts to adjust profit or loss for eligible financial assets by removing any additional accounting volatility that may arise as a result of IFRS 9; and a temporary exemption an optional temporary exemption from applying IFRS 9 for entities whose activities are predominantly connected with insurance. These entities will be permitted to continue to apply the existing financial instrument requirements of IAS 39 until the application of IFRS 17 on January 1, (6)

18 2 Significant accounting policies continued 2.2 Changes in accounting policies continued Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group continued Amendments to IFRS 4 Applying IFRS 9, Financial Instruments, with IFRS 4, Insurance Contracts continued The amendments are effective as follows: the overlay approach is applied when entities first apply IFRS 9 from its effective date of January 1, ; and a temporary exemption from IFRS 9 is applied for accounting periods on or after January 1,. The Group does not plan to elect the use of temporary exemption from IFRS 9 on its effective date, as the Group s activities overall are not predominantly connected with insurance. IFRS 17, Insurance Contracts The IASB has published IFRS 17, Insurance Contracts. The new Standard replaces IFRS 4 which was published in IFRS 17 requires all insurance contracts to be accounted for in a consistent manner, benefiting both investors and insurance companies. Insurance obligations will be accounted for using current values instead of historical cost, ending the practice of using data from when a policy was taken out. The Standard introduces insurance contract measurement principles requiring: current, explicit and unbiased estimates of future cash flows; discount rates that reflect the characteristics of the contracts cash flows; and explicit adjustment for non-financial risk. Day one profits should be deferred as a contractual service margin and allocated systematically to profit or loss as entities provide coverage and are released from risk. Revenue is no longer equal to written premiums but to the change in the contract liability covered by consideration. A separate measurement model applies to reinsurance contracts held. Modifications are allowed for qualifying short-term contracts and participating contracts. Increased disclosure requirements also apply. IFRS 17 is effective for reporting periods beginning on or after January 1, 2021 but may be applied earlier. The directors anticipate that the application of IFRS 17 in the future may have a material impact on the amounts reported and the disclosures made in the consolidated financial statements. However, management has not yet fully assessed the impact of IFRS 17 on these consolidated financial statements. IFRS 16, Leases IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between onstatement of financial position finance leases and off-statement of financial position operating leases. Instead, there is a single, on-statement of financial position accounting model that is similar to current finance lease accounting. (7)

19 2 Significant accounting policies continued 2.2 Changes in accounting policies continued Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group continued IFRS 16, Leases continued Lessor accounting remains similar to current practice i.e. lessors continue to classify leases as finance and operating leases. For lessees, the lease becomes an on-statement of financial position liability that attracts interest, together with a right-of-use assets also being recognized on the statement of financial position. In other words, lessees will appear to become more asset-rich but also more heavily indebted. The impacts are not limited to the consolidated statement of financial position. There are also changes in accounting over the life of the lease. In particular, companies will now recognise a front-loaded pattern of expense for most leases, even when they pay constant annual rentals. The standard is effective for annual periods beginning on or after January 1, The impact of IFRS 16 is being assessed by the directors of the Group. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. 2.3 Basis of consolidation The Group financial statements consolidate those of the parent company and all of its subsidiaries as of. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of June 30. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. 2.4 Cash and cash equivalents Cash comprises cash on hand and demand and call deposits with banks. Cash equivalents are short-term, highly liquid investments with original maturities of ninety (90) days or less that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Cash and cash equivalents are subject to an insignificant risk of change in value. Cash and cash equivalents exclude balances held to meet statutory requirements and restricted deposits. (8)

20 2 Significant accounting policies continued 2.5 Financial assets and liabilities In accordance with IAS 39, all financial assets and liabilities which include derivative financial instruments are recognised in the statement of financial position and measured in accordance with their assigned category. Financial assets The Group allocates its financial assets to the IAS 39 category of: loans and receivables and available-forsale financial assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than: (a) those that the Group intends to sell immediately or in the short term, which are classified or held for trading and those that the entity upon initial recognition designates at fair value through profit or loss; (b) those that the Group upon initial recognition designates as available-for-sale; and (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. Loans and receivable are recognised when cash or the right to cash is advanced to a borrower and are carried at amortised cost using the effective interest method. The Group s loans and receivables include cash in bank and cash equivalents, treasury bills, deposits with other financial institutions, loans and advances to customers, originated debt, financial asset and other receivables within other assets. (ii) Available-for-sale financial assets Available-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Purchases and sales of available-for-sale financial assets are recognised on settlement date the date that an asset is delivered to or received by the Group. Available-for-sale financial assets are initially recognised at fair value being the transaction price less transaction costs. Available-for-sale financial assets are subsequently measured at fair value based on the current bid prices of quoted investments in active market. If the market for available-for-sale financial assets is not active (such as investments in unlisted entities) and the fair value cannot be reliably measured, they are measured at cost less any impairment loss. Gains and losses arising from the fair value of available-for-sale financial assets are recognised though other comprehensive income until the financial assets are derecognised or impaired, at which time, the cumulative gain or loss previously recognised through other comprehensive income is transferred and recognised in the profit or loss. (9)

21 2 Significant accounting policies continued 2.5 Financial assets and liabilities continued Financial assets continued (ii) Available-for-sale financial assets continued Interest calculated using the effective interest method, dividend income and foreign currency gains and losses on financial assets classified as available-for-sale are recognised in the consolidated statement of income. Dividends on available-for-sale equity instruments are recognised in the consolidated statement of income when the right to receive payment is established. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. The Group s available-for-sale financial assets are separately presented in the consolidated statement of financial position. Financial liabilities Financial liabilities are classified as financial liabilities at amortised cost and are initially measured at fair value, net of transaction costs. They are subsequently measured at amortised cost using the effective interest rate method. Financial liabilities include customers deposits, liability under acceptances, guarantees and letters of credit and accumulated provisions, creditors and accruals. Financial liabilities are derecognised when they are extinguished that is, when the obligation is discharged, cancelled or expires. Derecognition Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. Reclassification of financial assets The Group may choose to reclassify financial assets that would meet the definition of loans and receivables out of the held-for-trading or available-for-sale categories if the Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification. Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows adjust effective interest rates prospectively. (10)

22 2 Significant accounting policies continued 2.6 Classes of financial instruments The Group classifies the financial instruments into classes that reflect the nature of information disclosed and take into account the characteristics of those financial instruments. The classification hierarchy can be seen in the table below: Cash and cash equivalents and deposits with other financial institutions Bank accounts Financial assets Loans and receivables Treasury bills and originated loans Loans and advances to customers Government fixed rated bonds and long term note Primary lenders Financial liabilities Available-forsale financial assets Financial liabilities at amortised cost Investment securities Available-for-sale investments Equity and debt securities Customers deposits and liability under acceptances, guarantees and letters of credit Other accumulated provisions, creditors and accruals 2.7 Impairment of financial assets (a) Assets carried at amortised cost The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Group uses to determine that there is objective evidence of an impairment loss include: Cash flow difficulties experienced by the borrower; Delinquency in contractual payments of principal and interest; Breach of loan covenants or conditions; Deterioration in the value of collateral; Deterioration of the borrower s competitive position; and Initiation of bankruptcy proceedings. (11)

23 2 Significant accounting policies continued 2.7 Impairment of financial assets continued (a) Assets carried at amortised cost continued The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has occurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of income. If a loan and receivable has a variable interest rate, the discounted rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may or may not result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the Bad Debt Recovered income account which is then used to decrease the amount of the provision for the loan impairment in the consolidated statement of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss is recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the consolidated statement of income. (b) Assets classified as available-for-sale The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-forsale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the consolidated statement of income. Impairment (12)

24 2 Significant accounting policies continued 2.7 Impairment of financial assets continued (b) Assets classified as held for sale continued losses recognised in the consolidated statement of income on equity instruments are not reversed through the consolidated statement of income. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the consolidated statement of income. (c) Renegotiated loans Loans and advances that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. Management continuously reviews these accounts to ensure that all criteria are met and that future payments are likely to occur. 2.8 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.9 Employee benefits (a) Short-term employee benefits Short-term employee benefits, including holiday entitlement, are current liabilities included in accumulated provisions, creditors and accruals, measured at the undiscounted amount that the Group expects to pay as a result of the unused entitlement. (b) Gratuity The Group provides a gratuity to its employees after fifteen (15) years of employment. The amount of the gratuity payment to eligible employees at retirement is computed with reference to final salary and calibrated percentage rates based on the number of years of service. Provisions for these amounts are included in the consolidated statement of financial position. (c) Pension plan The Group operates a defined benefit plan. The administration of the plan is conducted by National Caribbean Insurance Company Limited, one of the subsidiaries. The plan is funded through payments to trustee-administered deposit funds determined by periodic actuarial calculations. A defined benefit plan is a pension plan which defines an amount of pension benefit that an employee will receive on retirement based on factors such as age, years of service and final salary. The cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuation being carried out at the end of each reporting period. (13)

25 2 Significant accounting policies continued 2.9 Employee benefits continued (c) Pension plan continued The asset figure recognised in the consolidated statement of financial position in respect of net defined benefit asset is the fair value of the plan assets less the present value of the defined benefit obligation at the reporting date. The retirement benefit asset recognised in the consolidated statement of financial position represents the actuarial surplus in the defined benefit plan. Remeasurements comprising of actuarial gains and losses, the effect of the asset ceiling (if applicable) and the return on plan assets (excluding interest) are recognised immediately in the consolidated statement of financial position with a charge or credit to other comprehensive income in the period in which they occur. Re-measurement recorded in other comprehensive income is not recycled. However, the Group may transfer those amounts recognised in other comprehensive income within equity Property, plant and equipment Land and buildings held for use in the rendering of services, or for administrative purposes, are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity, usually every five (5) years, such that the carrying amount does not differ materially from that which would be determined using fair values at the year end. Any revaluation increase arising on the revaluation of such land and buildings is credited in equity to revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in income, in which case the increase is credited to income to the extent of the decrease previously charged. A decrease in the carrying amount arising on the revaluation of such land and buildings is charged to income to the extent that it exceeds the balance, if any, held in the fixed asset revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is charged to income. On the subsequent sale or retirement of a revalued property, any revaluation surplus remaining in the revaluation reserve is transferred directly to retained earnings. No transfer is made from the fixed asset revaluation reserve to retained earnings except when an asset is derecognised. Projects ongoing represents structures under construction and project development not yet completed and is stated at cost. This includes the costs of construction and other direct costs. Projects ongoing is not depreciated until such time that the relevant assets are ready for use. Freehold land is not depreciated. Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is calculated on the following basis: Buildings: Leasehold improvements: Equipment, fixtures and fittings and motor vehicles: years 25 years, or over the period of lease if less than 25 years 3 10 years (14)

26 2 Significant accounting policies continued 2.10 Property, plant and equipment continued Depreciation is charged so as to write off the cost or valuation of assets, other than freehold land, over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year-end, with the effect of any changes in estimates accounted for on a prospective basis. All repairs and maintenance are charged to consolidated statement of income during the financial period in which they are incurred. The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in the consolidated statement of income Intangible assets Acquired computer software licences are capitalized on the basis of the costs incurred to acquire and to bring into use the specific software. These costs are amortized on the basis of the expected useful life of such software which is three to five years. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable Impairment of non-financial assets Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date Insurance contracts i) Classification The Group issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. ii) Recognition and measurement Insurance contracts issued are classified as short-term insurance contracts and long-term insurance contracts with fixed and guaranteed payments. (15)

27 2 Significant accounting policies continued 2.13 Insurance contracts continued ii) Recognition and measurement continued Short-term insurance contracts Property and casualty insurance business Property and casualty insurance contracts are generally one year renewable contracts issued by the Group covering insurance risks over property, motor, accident and marine. Property insurance contracts mainly compensate the Group s customers for damage suffered to their properties or for the value of the property lost. Customers who undertake commercial activities on their premises could also receive compensation for the loss of earnings caused by the inability to use the insured properties in their business activities (business interruption cover). Casualty insurance contracts protect the Group s customers against the risk of causing harm to third parties as a result of their legitimate activities. Damages covered include both contractual and non-contractual events. The typical protection offered is designed for individual and business customers who become liable to pay compensation to a third party for bodily harm or property damages (public liability). Premiums are recognized as revenue (earned premiums) proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at the reporting date is reported as the unexpired insurance risk. Premiums are shown before deduction of commissions. Claims and loss adjustment expenses are charged to income as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the reporting date even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims. Liabilities for unpaid claims are estimated using: the input of assessments for individual cases reported to the Group; and statistical analyses for the claims incurred but not reported. These are used to estimate the expected ultimate cost of more complex claims that may be affected by external factors (such as court decisions). Health insurance business Health insurance contracts are generally one year renewable contracts issued by the Group covering insurance risks for medical expenses of insured persons. The liabilities of health insurance policies are estimated in respect of claims that have been incurred but not reported and claims that have been reported but not yet paid, due to the time taken to process the claim. (16)